The Economics of Affordable Housing

I hope Seattle's David Schraer has an unlisted phone number.

Anyone with so much common sense, living in the midst of such a loony bin, is bound to get hate calls.

In a guest column appearing in Tuesday's Seattle Post Intelligencer -- which makes so much sense I'm surprised it wasn't spiked -- Schraer explains something that seems to have eluded most of the city's leaders: that you can't wage regulatory war on developers, and relentlessly drive up the cost of building and the cost of land, and still have affordable housing and a reasonable cost of living.

If you take steps that restrict supply, un-met demand will drive prices higher. If you impose regulatory burdens on builders, that's reflected in higher costs that get passed on to buyers. It's elementary economics, yet most elected officials can't grasp it.

A recent study showed that local government regulations added about $200,000 to the cost of a house in Seattle, according to this report in the Seattle Times. Here's an excerpt:

"Backed by studies showing that middle-class Seattle residents can no longer afford the city's middle-class homes, consensus is growing that prices are too darned high. But why are they so high?

An intriguing new analysis by a University of Washington economics professor argues that home prices have, perhaps inadvertently, been driven up $200,000 by good intentions.

Between 1989 and 2006, the median inflation-adjusted price of a Seattle house rose from $221,000 to $447,800. Fully $200,000 of that increase was the result of land-use regulations, says Theo Eicher — twice the financial impact that regulation has had on other major U.S. cities.

"In a nationwide study, it can be shown that Seattle is one of the most regulated cities and a city whose housing prices are profoundly influenced by regulations," he says."

Then people wonder why all the lower- and middle-income people have left town.

The Seattle Times article and Schraer's guest column (pasted below) should be required reading for elected officials in Colorado cities -- in all cities -- that still can't connect the dots between regulator causes and market effects, and who will do everything in their power to drive up the cost of building, and create a scarcity of affordable and buildable land, all while decrying the lack of affordable housing.

Their misguided response to the affordable housing problem -- an approach Durango just embraced, unfortunately -- is to force private developers to build affordable units, as a condition of zoning or permit approval, which they do by raising the price tag on un-subsidized units. This unjust form of coercion travels under the euphemism "inclusionary zoning." A lucky few get subsidized living space, while everyone else pays more and the overall cost of housing creeps skyward.

What Steamboat Springs is learning the hard way is that you can require that a developer build affordable units, which come with appreciation caps, deed restrictions and other strings attached, but you can't make the public buy them. Market incentives almost always work better than mandates do -- but that presumes that the people making the rules understand market dynamics and basic economics. A surprising number of elected officials seem to be economic illiterates. Maybe we should make the passing of a pop quiz on basic economics a prerequisite to running for office.

But I digress. Here's Schraer's op-ed:

Housing at risk in Seattle

By DAVID SCHRAER

When housing is in short supply, why are we making it more complex and expensive to build?

For more than a decade, Seattle has experienced an unprecedented building boom during which prices were always up, money was cheap and wealth was inflated by rapid appreciation.

The boom followed the anti-tax, anti-immigrant movements that slashed government revenue and led to policies requiring new developments to pay for every imaginable impact. Planning and building departments were ordered to cover their costs through fees, creating many new hurdles and passing the costs on to developers. Fees, professional services and interest now add thousands of dollars to the cost of every new house, apartment or condominium.

Cities once understood that development generates community wealth through sales and property taxes, construction wages and new economic activity. Permit fees were low, impact fees unknown and cities funded their planning and building departments from general revenues. Municipalities considered streets, sidewalks, utilities and public services as investments that would generate community wealth over time.

Today, Seattle penalizes new development rather than waiting patiently for taxes that flow in their wake, generating three problems.

First, additional fees and processes increase the initial project risk and costs. These costs are marked up and passed on to the buyer or renter. Second, the higher risk and costs inhibit development and reduce market supply, further increasing prices. Third, the city's enthusiasm to offload costs to the private sector results in policy gimmicks, such as incentive zoning.

The elephant in the room is the private sector provision of affordable older housing. Almost all work force housing has been and will be provided by older homes and apartments in the private sector. We need to remove barriers to housing development and build the large numbers of new housing units required to moderate rents and housing prices.

Public and philanthropic investment should focus on providing permanent affordable housing that maximizes the return on our investment, such as land trusts and mission-driven, nonprofit-owned housing. Housing levies, the primary traditional mechanism for local funding of affordable housing, are a good example. Seattle residents overwhelmingly have supported housing levies, leaving no justification for an end-run around voters.

During an economic downturn, pay-to-play barriers cobbled together during the boom will reduce our housing supply and rapidly inflate prices. With political will, Seattle can dramatically increase the supply of housing through policy changes. Significant increases in zoning capacity, new clarity and stability in codes and a return to funding infrastructure through broad-based taxes are all measures that will increase housing supply, moderate prices and lower the cost of mission-driven affordable housing, too.

Our primary strategy for affordable housing must be to build as much quality housing as possible to increase supply. Our secondary strategy should be to directly fund as much affordable housing as possible, all in permanent ownership by public and not-for-profit housing agencies.

Public policy that increases the cost of developing dense, green, quality housing equals more expensive housing overall and less affordable housing. There are times for cities to be pro-development. When the world, country, state and city are in recession, or worse, and housing is in short supply, that time is now.

David Schraer is a Seattle architect with in-plain-air architects and was the first executive
director of the White Center Community Development Association.